Stock Split v/s Bonus Issue: Know the Difference

Among the known corporate actions, Bonus issues and Stock Split are two measures undertaken by companies to boost the number of shares. In both cases, the number of shares with the shareholders will be enhanced without paying any extra amount. However, the objectives of both the concepts are different and here we are to let you know the difference.

What is a Bonus Issue?

Bonus Issue also known as Capitalization Issue, offers additional shares to the existing shareholders without any cost. Companies when they have a profitable turnover, use this method to reward their shareholders. They are issued out of the reserves of the company.

Bonus shares are distributed in proportion to an investor’s shareholdings. For instance, when a firm offers 5:1 bonus shares, it means that for every 5 shares held in your Demat account ( as on the record date), the shareholder will receive 1 bonus share. So, if you hold 100 shares of that firm, you will receive 20 bonus shares.

To illustrate the effect on the shares of an existing shareholder of a company, let us assume a bonus issue of different ratios – 1:5, 1:1 and 5:1

By issuing bonus shares, the number of outstanding shares increases with a proportional decrease in the value of each share ensuring no change in the market capitalization as shown in the table above. However, the face value of the shares remains unchanged.

Many companies see bonus issues as a viable alternative to dividends. Bonus issues are payments made to shareholders from a company’s net reserves while dividends are paid out from net profits. Dividends are paid to shareholders in the form of cash which gets credited to your registered bank account (linked to Demat account), while bonus issues are paid in additional shares. As a result, it increases the value of its stock, making it more enticing to investors.

What is a Stock Split?

A stock split is an action taken in which a company divides its existing shares into multiple shares to boost the liquidity of shares. Split is usually undertaken when the stock price is high, making it pricey for investors to acquire. It brings down the share price as the number of shares increases. The market cap of the firm and the value of each shareholder’s investment stay unchanged after a stock split.

Like Bonus Issues, the price gets decreased by the ratio. To illustrate,

However, the face value of the share changes with the stock split. If the face value of a stock is Rs 10, and the stock is split in the ratio 1:2, the face value of the stock after the stock split becomes Rs 5.

Differences between Bonus Issue and Stock Split

Both Bonus Issue and Stock Split are effective ways to attract retail participation by increasing the number of shares and reducing the share prices. The existing shareholders in both cases will get to increase their number of shares without paying any extra amount. However, they differ in their rationale, affecting the face value, and reserves and surplus of the company as seen above. Either Bonus Issue or Stock Split, the number of shares increases, the share price decreases without change in the value of investment of existing shareholders and market capitalization of the company.